Friday, November 21, 2008

Podcast on Free Banking

In trying to understand the factors contributing to our current economic mess, I have done quite a bit of reading into the history of banking and money, with a particular eye toward understanding the rationale and formation of central banking in general and the Federal Reserve in particular. I am more and more convinced by both the theory and by historical experience that working toward a system of free banking and sound currency (i.e. commodity money like the gold standard) is a significant part of the solution.

I still plan to summarize my reading on this subject in a post, but until then, an excellent discussion of free banking can be found at EconTalk with Russ Robert and George Selgin. As usual, a list of resources is given below the buttons for the podcast. You can listen (takes just over an hour) or read the highlights posted below buttons..

Enjoy! The more informed we are, the better chance we have of making good decisions.


Anonymous said...

Beth, I will be interested to read your summary. I'll be especially interested to see your handling of the challenges that would arise if the US went back to the gold standard particularly given that most (all?) of the world is not on a gold standard and many foreign currencies are pegged to the dollar.

You have chosen a huge topic. The challenge of presenting the benefits and costs of fiat money versus gold standard money, and of addressing the role of central banks across the world is not small.

I have one question I hope you will answer: is fiat money really any different from gold standard money, or is it the people who control it?

Beth said...

(Corrected comment from previously posted and then deleted.)

Dear anonymous,

Did you have time to listen to the podcast? It really is very interesting. I’d love to hear your take on it.

Short answer on the gold standard and fiat money. The real problem which needs to be addressed is finding some standard, some base to which the value of paper (or electronic) currency can be tied and protected from manipulation. Money serves several purposes. Acting as a medium of exchange and as a store of wealth are two crucial ones. These purposes are severely undermined when some one or some group has the power to shift the value. Think of the chaos and injustice which would occur if the government could change the length of the yardstick or the meterstick to suit its own purposes.

Does the commodity need to be gold? No, but historically, that has been the standard which evolved. Additinally, the intrinsic qualities of gold (durability, divisibility, portability, scarcity) are ones that make it highly suitable to the task. Does the standard have to be a commodity? Maybe not. I’d be interested in reading a defense of another standard. Whatever other method is proposed would have to address the problem of keeping the standard honest. I can’t picture a fiat money standard that is not vulnerable to manipulation, but I am open to considering other proposals.

As far as switching, the first step would simply be repeal of legal tender laws and then allowing competition between monies to operate. Elaborating on that goes past my goal of keeping this a short answer.

This is a big topic, but one that is central to our current crisis. If extreme volatility in the business cycle truly is caused by government manipulation of the money supply as I have proposed, then to prevent this from recurring, we need a different system. I think that system is free banking and free money to replace our current system of central banking and fiat legal tender….but that is what my reading is exploring and I have a ways to go.

Good questions. Thanks again.